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Introduction

Skimming Pricing. Market


Penetration Pricing Strategy is
Pricing is the core decision of adopted
any
when the manager wants to
firm; theoretically it seems to be get
very comparative advantage over other
simple for setting price under perfect
competitors by charging reduced
competition and monopoly orprice; but Market Skimming Pricing
monopolistic competition but Strategy is adopted when the manager
practically there are many factors that
creates its products' demand through
might influence in setting a price
promotional activities and charge
which a consumer will bear to pay.higher price. In both the cases the
ultimate objective is to broaden profit;
No doubt demand and supply forces
first by volume and later by higher
can play a vital role in determining
price.
price of any product but pricing
strategy formulation is not as simple
Factors of Price
as it is assumed theoretically as Possible
an
Escalation
intersection point of demand and
supply curves.
Since no one wants incur
to
losses so
Although; for some products the
prices are set by 'Cost-plus-Markup'
, ACMA
manager has to fix an established
strategy; and unfortunately for the last Irshad Ali Syed
market price because the consumer
many years cost of production and
will not pay more than this price;costfor of the goods that imported
are
Pricing Strategies for
example basic raw materials of most
from abroad has been rising at very
of the products usually follow this
high rate. Following are some of the
pattern. But generally; the managers
factors that might affect charginglaunching a New
use cost-plus markup approach higher
to
prices in Pakistan:
determine the price ofproduct
a
but
Exchange
Rate:
Product can be Market
without knowing the consumer's
were $34.086 billion from
behavior towards their willingness Imports
to
July 1, 2014 to April 30,2 2015 , which
pay for that product; he or she cannot
Penetration Pricing or
s e t a n y p r i c e . T h e r e f o r e is
; a major part of goods and services
responsiveness of consumer towardsused in the country; mostly payments
dollar and during theMarket Skimming
are made in US
the product is a key element in setting
price; this is called Price Elasticitylast
of 5 years there has been
approximately 24% increase in thePricing
Demand.
rate of US Dollar to
Price elasticity of Demand can exchange
be
Pakistani
Rupee;
so due to this higher
defined as The ratio of proportional
rate, thecost of production
change in quantity demanded to exchange
a
1
or Cost of Finished Goods to be sold
proportional change in price
. The
manager should set higher markup has
for risen swiftly. To cover this
in cost the firm must escalate
the product to which consumers increase
are
its
price.
insensitive towards its price and

FOCUS SECTION

The Science of Pricing and


Cost Management

conversely lower markup should be


Power and Energy Prices:
set when consumers are sensitive
If only variable portion of Industrial
towards its price. The firm must
Supply Tariff B-1 is taken as an
reduce Elasticity by promotion and
example then we can notice that there
advertising of its products so that
has been 63% increase in the
higher price can be charged and profit
electricity cost from 2010 to 3 2015 .
margin can be enhanced; therefore 4
Similarly Gas sector showed almost
Ps' of Marketing (Price, Product,
same trend as electricity. It has made
Place, and Promotion) effects demand
the cost of production high which
which in turn play a key role in
would compel the producer to set
grabbing market share and
increase
inflated price.
profitability as a whole.
Costs:
Pricing Strategies for launching Promotional
a
Advertising is no more avoided in this
New Product can be Market
Penetration Pricing or Marketera. A firm can introduce and create

ICMA Pakistans Management Accountant, November-December, 2015

25

value of its products only by advertising. It also helps in reduction


elasticity of demand will remain same during this increase.
of price elasticity of its products so that firms can set price of their
firm should know this degree of elasticity of their products.
own choices to some extent. Nowadays; the most effective
Cost Management:
medium of advertising is electronic media. During 9:00 pm to 9:59
has become very difficult in Pakistan especially
pm (Peak Hour); a renown TV news channel charges Rack Cost
Rate management
of
of China; as inland manufacturing cost is generally higher
Rs. 220,000 per minute.
Ads in reputable news papers and cost because
of
bill boards have tremendously risen up during the last ten than
years.the import from China. However, if firms start mass
Hence; this cost again shifted to customers and become
of theone production like China then they might be able to reduce per unit
cost by enjoying economies of scale; this can only happen if proper
factors of setting high price.
knowledge of the demand of their products; is obtained. Similarly,
A Different Aspect of Pakistani Economy
a Management Accountant can also help them to rule out excessive
cost during their production processes by analyzing their formats.
Regarding Price Strategy
If the cost minimizes then ultimately; lower price can be set which
As Pure Capitalism and Socialism do not exist in any part
the demand of products.
will ofcreate
world and Mixed Economy is prevailing internationally. In Mixed
Comparative Advantage:
Economy System, with the involvement of demand and supply
plays a vital role in controlling Prices
forces, estate or government
Firms can get comparative advantage over others only if they have
to manage inflation in the society so that any specific Capitalist
self sufficiency in controlling their costs and can produce
cannot exploit the society.
will this
particular products at a lower relative opportunity costs;
leadtothem to set a competitive price which will be lower than their
The governments in Third World Countries like Pakistan seem
competitors.
be powerless regarding price controlling of the giant companies
that are providing basic raw materials, goods and service in the
economy. Due to this reason; costs of production for local Conclusion
SMEs
become high.
Pakistani economy has become very unpredictable regarding
of demand; we are so fool that we make a queue of 80 to
Unfortunately; government is unable to decrease the gapelasticity
of
100
people
to purchase a burger of a foreign food
chain by
paying
Revenue-Cost of the cartels that are leading Pakistani economy.
minimum Rs.500 for one burger; similarly multinational
companies are charging very high rates even for basic necessities;
Price Setting Strategies for Pakistani Local
no doubt quality does matter and government should play its role to
Firms:
check their gap of cost and revenue. Local firms have been facing
As pointed out earlier; due to heavy cost of imports, power
manyandchallenges to set their price because of higher costs and
energy, and advertising; a local firm is in a very difficult situation
uneven toresponsiveness of Pakistani customers.
set a price that covers its costs and compete with the other firms.
A better price strategy can be formulated by considering cost
Therefore; in Pakistan very few options are available for the firms
management and price elasticity; sometimes a firm can adopt price
to take or set their prices in this way that they survive.
sometimes it
skimming, sometimes price penetration, and
Product Differentiation:
becomes loss leader; these all market price strategies are dependent
on costs (future or present) and price elasticity of the products.
Customers want quality and diversified products at lower prices
However;
but the suppliers can only do so by using hi-tech equipments
and the role of governments cannot be overlooked because
price setting is influenced by the inflation in general.
procedures; it ultimately increases the cost of the product which
forces them to charge higher price. Product differentiation References:
will
help the firms to reduce the elasticity of their products and create
1.
A Dictionary of Economics, Third Edition, Oxford University Press.
value of their products; therefore customers will be willing to pay
2.
Economic
Survey of Pakistan 2014-15
for the differentiated products according to their demands.

Knowing Degree of Elasticity:

3.
4.

SRO 913 (I)/2010 and SRO 677/2015 of Ministry of Water & Supply
http://www.mckinsey.com/insights/marketing_sales/building_a_
better_pricing_infrastructure
and found

4
McKinsay & Co. studied the Global 1200 Company
that a small increase in price will lead to a big profit provide that

Chief Operating Officer

Chief Research Officer

Placement:

Karachi

Placement:

Karachi

Industry:

Oil & Gas

Level:

Top Management Level Position

Qualification:

FCMA / ACMA

Experience:

10-12 years experience

Industry:

Insurance

Level:

Top Management Level Position

Qualification:

ACMA / FCMA

Experience:

10-12 years of experience in insurance

Salary:

PKR 200,000/- per month

Age Limit:

Not more than 45 years

Salary:

Not-mentioned

Contact:

crc.khi@icmap.com.pk

Contact:

crc.khi@icmap.com.pk

26

ICMA Pakistans Management Accountant, November-December, 2015